Coca-Cola in 2011: In search of a New Model. HBS 9-711-504
Analyze the economics and industry structure of the
soft drink industry. Specifically, compare and analyze the profitability
of the concentrate and bottling segments of the industry.How has competition between Coke and Pepsi affected the industry and industry profitability?How should Coke and Pepsi react to changes in the soft drink market and to changes in consumer behavior? Your posts to questions 1, 2, and 3 should in total be around 1000 – 1200 words. Please also use exhibits and charts  as necessary to support your text answers.
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HARvARD III BUSTNESS I SCHOOL
9-711-504
REV: AUGUST 74,2012
DAVID B. YOFFIE
RENEE KIM
Coca-Cola
in 2011: In Search of a New Model
Muhtu Kmt, CEO of The Coca-Cola
C-ompany (Coke), breathed a slgh of relief. On October 3,
201O he had finally dosed the Iargest acquisition in the company’s history: the $12 billion purchase
of
the North American operations of Coca-Cola Enterprises (CCE), Coke’s largest franchised bottler.
With the acquisition, Coke now controlled approximately n% of its total North American volume,
reversing its 19{16 decision to separate ibelf from dre bottling business.
For most of the last 125 years, Coke had manufactured concentrab and focused on driving
demand and customer loyalty through heury investrrents in brand marketing. The capital-intensive
job of producing drinks, running trucks, and supervising distributors mainly resided with Coke’s
franchise bottlers. This business model had served the company well. Coke had become the world’s
largest soft-drink comptmy, selling 1.7 billion servings of beverages every day to consumers in over
200 countries through more than 300 bottling partners. Coke was considered the most recognized,
powerfuI brand in the world, valued at $70 billion in 2010.1
At the same time, Coke faced several challenges in the U.S. market, which prompted Kent to rethink the strategy. S.[i.g sodas was no longer enough to quench American consumers’ thirst and
taste preferences. Carbonated soft drinks, which represented 76% of Coke’s global volume, had lost
some of frl€tr ffzz amid anti-obesity campaigrrs and active lifestyle movements. Consurrrers sought
alternative non-carbonated beverages, ranging from teas to coconut water, which involved different
production and distribution methods from Cokds traditional system. Broader issues surfaced as well,
induding,environmental concerns about packaging and rising commodiqz costs (see Exhibit 1 for the
challenges fuci*g Coca-Cola). Digrht media and social networks were also changing the marketing
Iandscape Coke could no longer rely on traditional media alone to drive brand preference.
Depite Ore challenges, Kent was confident that Coke could achieve lts'{}Z}vision” to double the
Coca{ola system’s revenues by the year 2020 (see Exhibit 2 for a summary of the company’s vision
for 2020).2 B.ryi.g CCE was an important component for realizing this vision- Kent daimed, “I think
there is no better system in the world than the franchise model, but it has to evolve.”3 Yet there were
many ways the franchise systert could evolve. Fog example, should Coke keep the bottling business
and control the whole value chain? Or, should Coke “fii” CCE and refranchise the bottling business,
as it had done in the past? Or perhaps Coke should keep manufacturing and refranchise rliskibutioo
similar to what the beer industry did? For one of the most successful companies in the world over the
last cenfury, Kent’s answers to these questions had the potential to redefine Coke’s business model
for the next 1ffi years.
Prcfarcr David
Cas m
Coplright
7685,
B. Yoffie md Rmarch Asriate Rme Kim prepared this cae. HBS cases are developed sotely as the basis for class discmsion
not interded to sere c mdomments, sourcs of primary data, or illustntiom of effective or inef(ective mamgemort.
@ 2011, 2012
Prci&nt
arvil Fetlove o( Elaryud Cotlege. To order copic or requct [Emissim to reproduce mtcials, call ].4m-54t
V263, or go to ffiib6p-hamdedu/educators. This publication uray not be
or othwi* reproduced, fnsted, or trffimitted, withmt the pemissim of flarvard Busines Schml.
mite Flanard Bwiness fthml Publishing. Bostm, MA
digitized,
photocold
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Coca-Cola in
ZlIl:
In Sesch of a New Model
History
Coca-Cola was
firstinvenH in
1886 byJohn P:TF*9ru a pharmacist based in Atlanta, Georgia.a
with carbonated waber and sold the a-.int at. soda .fountain in a local drugstore.
Five years later, Pemberton sold the concoction to Asa Candler, an Atlanta
businessrrun. Candler
aggressively marketed the soda and made Coca-Cola available in every
state by 1g95. He kept the
formula a secret and locked it up in a bank vault, creating widespread
,pld.tio., about the
ingredients. Convinced t-hat Coca-Cola’s future was in fountain-sales, iandler
sold the bottling right
two Chattanooga lawyers for $1 in 1g}). According to Candler, ,,we have neither
the money, nor
io
brains, nor time to embark in tfre bottling business.’s Contrary to Candlels belief,
the UorUi.g
business flourished. Over the next two decades, the Chattanoog, i”um created
a regional network of
more than 1,000 bottlers, which were usually locally owned anJoperated
FIe combined syrup
I^ 191’6, Candler sold. Coke to a group of investors, led by Emest Woodruff, who took the
company public that year. His son, 3&year-old Robert Woodruff, became president four years
later,
**kilq the beginning of a leadership that would span over six decades. Woodruff introduced
several halLrrark innovations to put Coke within an “arm’s width of desire,” such.
as the six-bottle
cartorL open-toP cooler, automatic fountain dispenser, and vending machine. Coke
became
slmonymous with famous advertising slogans such as the “Pause that rifreshes,, and ,,Ifs
the real
ttti”g.l The company’s product porffolio expanded by buying Minute Maid (1%0) and launching
new, flavored sodas, Fanta and Sprite.
Woodruff was also credited with turning Coca-Cola into an international phenomenon.
During
W-orld War II, he promised that “every man in uniform gets a bottle of Coca-Cola
for five cents
wherever he is and whatever it costs the company.” Coke received exemptions fiom
wartime sugar
rationing_for beverages that it sold to the milihry e1 fe lsfailsrs that ierved soldiers.
Sixty_fJur
overseas bottling plants were set up during the war throughout Europe and
Asia, not only ,”.,.ir,g
American soldiert
Tl *g gving locals their first exposure to Coke. Although woodruff-officiail|
retired in 1955, in effect, he continued to serve as eoke s patriarch until his death
in 19g5. He
1{!enced major corporate decisions, which included handpicking Roberto Goizueta to become the
cEo in 1%3’l-, overnthngretiring cEoJ. paul Austin’s own choice f6-1 his successor.
Goizueta Era (L9 1L-1917)
Goizueta, a chemical engineer from Cuba, took over Coke amid an intense cola war. pepsiCo
chipping away Coke’s lead in the U.S. market since fhe mid-1920s tnrougfr a
successfuI taste’test cha-llenge that promoted Pepsi as part of a young “Pepsi Generatioru,,
In the
battle for more market share, both companies pushed foi aggressive pri”u pro^otions;
reportedly as
much as 50% of their combined food-store volume was-sold at a diicount, erodini
margins.
Consumers, accustomed to such disgourts, frequently switched back and forth between
brands,
buying whatever was on sale. Goizueta fought-back by- stepping up Coke’s advertising spending.
Most of Coke’s non-soda business was sold off, including-;*t; and shrimp farming.”sugar was
replaced with high fructose corn symp, which cost about 407” less than naturaliugar.
(Pepst) -had been
The company introduced 11 new products during the 1980s, coupled with a greater
variety of
packaging. The biggest hit was the launch of Diet Cole in 1982. Initially, the idea
of extending the
trademark Coke name to another product was considered “heresy” by several company
insiders and
bottlers. But Goizueta pushed through and debuted Diet Coke with the most exflnsive
marketing
budget ($100 million inthe fust year) in the soft-drink industry’s history to date.
By the end of 19g3,
Diet Coke had become the best-selling diet soft drink.
CocarCoh nr
Ant h Seoct
of a New Model
z1-50{
in hopes of creating another hit like Diet Coke, Goizueta decided to change the
99-year-old
– -ft9*
Coke
formula and replace it with New Coke in April 1985. New Coke not only finlA,but
also found
itselflighting consumers’ emotional attachment to the old Coke. Goizueta ad-noitte4 ,,
/”
k r”* ro*”
pryple were going 0o be unhappy, but we could never have predicted the depth of their
unhappiness.”6 Three months later, Goizueta returned the original formula
und.er the brand. name
classic coke.TThe comeback drove Coke’s stock price to a rz-yir rrigtr.
Abroad Coke continued to expand its presence, most notably across Asia to Eastern Europe.
After
the fall of the Berlin WaIl in 1g]9, Coke quickly invesM $f.5 biUion into the region
to &allenge
Pepsi’s early foothold. Coke built new networks of bottlers and distribution routeJfrom
the bottom
up, while Pepsi continued to rely on its existing state.owned bottlers and network. By
1992,Coke,s
market share in several Easbrn European markeb, including Hungary, Poland, and Czechoslovakia,
had rtearly doubled from the previous year.s
The
lost
Decadc
1n1997, Goizueta’s leadership came to an abrupt end with his unexpected
death from lung cancer.
“He was great and he was brilJiant,” recalled .ILhn Farrell, vice presiderrt of strategic
dlanning.s
Coke’s market value had risen frorr $4 billion to $147 billioru the Jhare price had slqiocketed
over
5,000%, and coke had become one of the most highly valued brands in the world
.

Yet Coke’s leadership struggled for the next decade, starting with Goizueta’s successor,
Dougtas
Ivester (see Exhibit 3a for Coclcoh,s share price
after Goizueta,s death). Te 19g7
Asian financid crisis crimPed profits for the company that generated about twethirds
of its sales
from overseas. Another crisis surfaced in Belgium (1W) overineged contamination fears,
forcing the
company to conduct the largest recall in lts nistory. Ivester *J”riti.i*d for being
slow to react,
dealing a severe blow to Coke’s brand image.
The board chose to replace Ivester with Douglas Daft (20m-2004). He tried to
cut costs and laid
6,000 errployees
the early
Coke’i
biggest
reduction
in history. l,egal
iob
1m”,_
-ayrrng
globlems involving a racial discrimination suit and a questionable marketing test involving Burler
King cost Coke over $200 million in settlements.
gompany came undel investigation by U.S.
off over
-The profits
government authorities over claims that Coke inflabd
by shipping excessiJe amounts of
syrup to its overseas bottlers, a practice known af “channel stu-ffing.” Ai”oIO more contamination
scares surfaced in Irtdia and EuroPe, tainting c-okds already troubkd’image.
_ fveral big opportunities to erclrand Cokds business-wgrt astray as well. In 2000, Daft tried to buy
Quaker Oab for $15 billioru but the deal was killed at the last minute by several Coke directors who
tt”gt l th9 price tag, was too high.lo Pepsi bought euaker Oats instea4 gaining ownership of
Gatorade, the leading brand in the fast-growing category of sports drixks. tn ioot, a{ier two
years of
negotiations Save uP on efforts to buy
Bgach Beverage Co. (SoBe), only to watch pepsi
acquire it Around the same tirrre, Coke calledPllh
off a planned $a billion yuice ana chips joint venture
with Proct$ & Gamble. “It was iust one thing after another,” recalled’Clyde fuggli Coke,s serrior
vice president for global public atrairs and corurrunications.ll -We didn’t have tne riftrt answ€rs,
so we
kept stumbling tying to figure out how to get out of our financial, structural, ana rep-utation
mess.,,
Neville
replaced Daft in April 20M, Coke’s thfud CEO in seven years. He was a 3lyear
^ -E. veteran Isdell
Coke
who had been catled back from his retirement. ‘Neville was a world-class diplomat,
99 tlti” comPany had been successful when it worked with this kind of a leader,,, recalled Farrell.
Isdell returned to find a demoralized company struggling with declining sales and ineffective
toffier for the fust time in
marketing- He brought some 150 senior managers from across the globe
CoeC-oIaftr.dlfft In Seach of a New Model
y”T,,und they collaboraM to create a “manifesto for growth,” a new 1O-year strategic plan. ,,We
ld{ jo pull together and motivate our people again ana thafs exactly *frut w”rriUE did,,, stated
Farrell. The plan called for the revival of Coke’i core sparkling brands (Coca-Cola
Fanta, and Sprite).
Isdell subsequenfly committed $40O million for marketing to Jtrengthen their brand
power.l2 He also
expanded Coke’s porffolio to include non-sparkling ddnks such as enhanced water
and teas.
At the same time, f:de-l tri:d to bring back several senior managers who had left Coke
during its
turrroil induding Muhtar Kent. As the son of a Tur{ish diplomat, Kent spoke niany
languages and had spent much of his career with Coke overseas. He was kno* to
be personable yet
relentless, driven by a genuine passion for the business. Wiren running a brewery in
tsta11Uuf, fent
was frequendy spotted
to
shoppers in supermarkets and .*-to*.* in Lars, offering free
49S
bottles of his own brewery’s brand in hope of convincing them to switch. He retumed to
Coke in 2005
to spearhead the company’s international business; a year later, global sales increas ed^ 6%,
the best
gain in six years-13 In 2008, Kent took over ttrc CEO position from Isdell, who claimed that
he had
gnly wanted to stay for a few years. Isdell enthusiastically descriH Kent “Hds one of the world,s
best networkers, and that’s what you need in the business that we’re in.”1a Moving forward
analysts
noted thatlfte biggestchallenge for Kent was to figure out how to restore growth in North
America
the single largest market for non-alcoholic, ready-to-drink (NARTD) bevJages, amid fizzling
soda
period of
sales (see Exhibits 3b, a, and 5 share price performance and selected financialsi.
The Soft Drink Industry
Sparkling beverages were a $74 billion retail market in the United States that had thrived
under
interue competition behareerr Coke and Pepsi for over a cenfury.ls Consurrrption had steadily
IueT:d throughout the years, thanks to attractive prices and widespread avaitabitity, peating at
864 eight-ounce servings P€r Person per year in 1998. Although consumption had
declined amid a
wider variety of alternative beverages, the average U.S- consumer still drank 708 servings of sodas
a
year in 2010 (see Exhibits 5a and 6b for coruurrption nunbers for various beverages).
Migabrandsa brand or traderrark with annual volumes ercceeding 100 million 1.92-ounce
with
66%
the sparkling beverages’ market share led by Coke brands (see Exhibit
“u”ui-ao-i1uted
7 for the top-10
-o-!
sparkling brands)- The softdrink business model involved four primary participants: concentrate
producers like Coke itself, bottlers, retailers, and suppliers
C.oncenfuate Produczrs
Concentrate producers blended cornmon ingreCients and flavors, and shipped the mixture in
containers to bottlers. The manufagryg process itself involved relatively^frttlu i.,rrotment in
mac$nery, overhead or labor. A typical beverageconcentrate manufacturing plant could cost about
$50-$100 million to build and could supply several countries. As oi )m0, Cok” operated
approximately 30 principal beverageconcentrate plants for its entire market of over 200 countries.
Marketing, market research, and maintaining bottler relations were critical elements for
concenkate owners t9 build powerful, global brands. rl 2010 alone, Coke spent
$2.9 billion in
advertising expenses.l6 “The value of this business is in the brand,,, Kent insistfu. ,,Ifs much more
holistic than just the drink.” Botdersl cooperation played a major role in jointly implementing
rnrketing Programs created by Coke. To help “influence” bottlers, Coke devoted about
$t billion in
2010 for its bottlers and resellers worldwide
errgage in promotional or marketing programs.lz It
!
pursued customer developrnent agreements (C?_Ar), whereby bottlers used funds p.i”iaj by Coke
to secure shelf space with national retailers like Walmart and supermarket chains. In additio+
Coca€ola in 2$lft In Search of a New Model
concenkate owners-negotiated directly with their bottlers’ major suppliers to guarantee
low prices
and reliable supply for key ingredients.
Bottlers
Bottlers bought the concenkate or syrup, added carbonated water and. sweeteners, and
then
packaged the drinks into bottles or cans. Each beverage rern on a specialized, high-speed
production
line that was usuallylot interchangeable between diffLent producis and packag”e sizes. The cost of a
large plant with nrultiple tines arid automated warehousing could reach hundreds of millions
of
dollars. As such, the bottling process for sparkling ari”t
also known as ,,cold-fiIl ed,,, was
“,sodas. Bottlers were also resporuible
productive and mostprofitable with high-volume, high-demand
for selling and delivering drinks to customers. CCE, Coke’s largest bottler, operaied nearly 350
distribution outlets and around 55,000 vehicles in 2009.18 Through direct store delivery
1DSD),
bottlers t]rcmselves stocked the shelves, kept kack of inventory, and set up displays in retail outlets,
rather than delivering the beverages to a retailer,s warehouse.
Under this setup a typical bottlels cost of sales exceeded half of its total sales. Concentrate and
sweeteners represented the biggest expense, followed by packaging, Iabor, and overhead.
When
other expenses were taken into account, a bottle/s average opera-ting margin was arognd g7o,
coarpared to a concentrate owner/s operating margin of 32%
lsee E*ifit S for piofit margins).
Coke’s original 1899 franchise agreement granted bottlers the right to manufacture and operate in
an exclusive territory. They also had the right to sell their franchise contract to a thirt party,
transferring atl riShts in perpetuity. The concentrate price was fixed and did not pu.o,l,
renegotiations, even if ingredient costs changed. In addition, bottlers could carqr competitors, noncola brands and have a final say in retail pricing decisions. Don Keough, Coke’s president during the
1980s, lamented, “Everybottler on his dying bed calls his son to his side and, spei<;ng his last word.s, says 'dor(t you ever let them tcok"] mess with that contract.,,,1e Conflict over these contract terrns eventually erupted into bitter legal disputes for Coke. In19T11., the Federal Trade Commission tried to charge ttrat concentrate own&s, including Coke, restricted competition by granting exclusive territorial rights to bottlers. But after nine yiars of Iitigation, Congress passed an a9t that guaranteed the concentrate makers' right to uphold that practice. Meanwhile, soaring inflation in the 1970s sent ingredient costs to unprecedented levels. Under an amerrded contract in 1921, Coke had been buying a1l raw ingredients, except sugar, at current prices, but selling the symp to bottlers atlV2L price levels. After intense negotiadons ind dlsputes, bottlers finally agreed 1n1978 to incorporate inflation in ingredient costs. In ieturn, Coke proniised to spend more on advertising support- - Despite such changes, frustoations mounted between Coke and its franchise bottlers. By the time Goizueta had become CEO, several franchises had passed on to third-generation owners. fh"y "milk the franchise" rather than investiag in new equipmen! trying to increase -"ru their market share, or stepping up advertising antid ihe cola wars.20 "Bottlers basically did what they wanted to do, and consequently the U.S. system was not ilged:'according to tuggle. kked bi Coke's lack oI control, Goizueta reversed tactics and started to refranchis. tfr. U"tU;ij business in content to 1980. He bought underperforming bottlers, injected them then resold them to better-performing ones. with cash to turn around opirations, and The creation of CCE The most significant acquisition carne in 1985 when Goizueta seized the opportunig to buy two of Coke's biggest bottlers for 92.4 billion. That brought one_third of Coke,s volume under its direct conhol. The purchases also saddled Coke with *o.rnd $1 billion in long-term Coca{ola in debt. In 1986, Goaueta spun 2I}11: In Search of a New Model off the bottling operatioru into a new public company, Coca-Cola Enterprises (CCE ... Purchase answer to see full attachment